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Social Security Benefits and Bankruptcy in Washington State.

There are several issues that arise with respect to social security benefits when a recipient files bankruptcy. As a general proposition, 1) the right to receive social security payments in the future will not be lost to a bankruptcy trustee; 2) social security benefits held in a bank account should be safe if an exemption applies; and 3) social security income does not disqualify one from filing bankruptcy. Each of these issues are explained in greater detail below.

What Happens to the Right to Receive Social Security Income If You File Bankruptcy in Washington state?

Generally, a chapter 7 trustee has the right to all non-exempt assets of the chapter 7 debtor to the extent such assets are not encumbered by a lien. For example, the Washington homestead exemption is $125,000. If a chapter 7 debtor owns a home valued at $500,000 that is encumbered by a mortgage of $400,000, the trustee would have no interest in the debtor’s home given a) all but $100,000 is covered by a mortgage and b) the debtor’s equity of $100,000 is fully protected by the Washington homestead exemption afforded the debtor.

In Washington, a debtor can choose between the 1) Bankrutpcy Code’s set of exemptions, or 2) those exemptions provided by Washington law plus federal law other than the Bankruptcy Code. Non-bankruptcy federal law that exempts the right to receive social security benefits is provided at 42 U.S.C. § 407(a).

Accordingly, a debtor should not lose his/her rights to future social security benefits by filing chapter 7. Technically speaking, courts have determined such property interest is excluded from property of the estate (and not because of a properly claimed exemption). See e.g., In re Carpenter, 408 B.R. 244 (8th Cir. BAP 2009).

What Happens to Social Security Benefits Already Paid into a Debtor’s Bank Account After Filing Chapter 7 Bankruptcy in Washington?

Bankruptcy courts have also held that 42 U.S.C. § 407(a) “operates as a complete bar to the forced inclusion of past and future social security proceeds in the bankruptcy estate. We must conclude § 407 must be read as an exclusion provision, which automatically and completely excludes social security proceeds from the bankruptcy estate…” In re Carpenter, 614 F.3d 930, 936 (8th Cir. 2010). In other words, such past payments should be safe.

However, to avoid any claim of the trustee that past payments have been commingled and cannot be traced to social security proceeds as a result (and thus have lost their protected status), social security payments should be segregated and kept in a separate account.

Does Social Security Disqualify You from Filing Chapter 7 in Washington?

No. Social security income must be listed on the Chapter 7 debtor’s Schedule I. However, it is excluded from income in determining a debtor’s “current monthly income” for means test purposes. Therefore, if a debtor’s sole source of income is social security income, the debtor will not have to take the means test to qualify for chapter 7. See Bankruptcy Code § 101(10A)(B)(ii)(I).

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